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Sunday, February 08, 2015

Labor Market Conditions Index (LMCI) - A One Size Fits All View of the Labor Market

A quick glance at the economic calendar for any month makes it clear that there are numerous data elements that detail aspects of the labor market. Frequently, these elements directly contradict each other, which increases the difficulty in truly assessing the overall health and the overall trends that impact the workforce. Take, for example, the two most popular measures of the health of the job market, the Unemployment Rate (currently 5.6%) and the Participation Index (currently 62.7%.) The former has been trending downward for the past couple of years and is an indication of a healthy and growing workforce. The latter, however, has also been trending downward since 2010, and is an indication of a large number of eligible workers leaving the workforce. Both statistics are accurate to what they are intended to indicate, but neither accurately depict the health of the labor market in totality.

In an attempt to reconcile all the various economic indicators that touch some aspect of the labor market - and there are 19 such indicators - the Federal Reserve Board implemented a new index in mid-2014 that incorporates all of them. The Labor Market Conditions Index (LMCI) provides a single at-a-glance number that factors in such diverse measures as the number of hours worked, wages, hiring rates, hiring plans, jobs that are hard to fill, and the rate at which workers transition between unemployed to employed. There is a heavy weight placed on indicators that correlate well to each other, while those that diverge from other indicators are given less of a weight in the calculation of LMCI. Therefore, the jury is still out as to the effectiveness of this single Indicator of Indicators.

Indicators Included in LMCI

The LMCI for December - reported in January, 2015 - sits at 6.1, and it has been trending upward since August. As you can see from the following chart, however, the health of the labor market is not accurately portrayed by the Unemployment Rate, which has been improving steadily for two years. Neither is it accurately portrayed by the Participation Index which has been degrading steadily for four years. Rather, the correlation of the wide range of indicators gives a much more meaningful view of the overall health of the labor market. At least, that's the message it seems to portray looking at the graph of the last two years. To put the current graph in perspective, LMCI reached a maximum value of 28.6 in September, 1983. Its worst value was -43.3 in May, 1980.

LIMC - January 2013 to December 2014

The Labor Market Conditions Index for January, 2015 will be released on Monday, February 9 at 12:00 EST (15:00 GMT). While the data that comprise the indicator go back to the early 1970s, the indicator itself is still in its infancy. It remains to be seen how much of an influence LMCI will have on the overall market. With this being the only economic indicator of significance being announced on Monday, however, expect it to have some influence over afternoon trading, barring any geopolitical developments coming out of Greece, Germany, Ukraine, or Russia. While no consensus estimate has been released, I'm looking for a value of 6.9 or higher to indicate healthy growth in the labor market. A lesser value would indicate that factors other than the Unemployment Rate are taking a heavier toll on the job market than is currently factored into the economic outlook.